Scaling back the Nook e-reader would be bad news for book publishers

Barnes & Noble is girding the investment community for bad news, and if recent reports are to be believed, the U.S. bookseller’s upcoming financial report will directly impact consumers as well. B&N recently told investors it expects to take a big loss in the company’s Nook division when it reports quarterly sales numbers on Thursday, falling short of the company’s projected $3 billion sales goal.

Barnes & Noble’s losses are prompting the company to consider scaling back its Nook business to instead focus on licensing its content catalog to other device makers, according to The New York Times. A "person familiar with Barnes & Nobles’s strategy" claims that Barnes & Noble will streamline the number of Nook devices it makes and instead focus on licensing its content to other manufacturers, such as Microsoft and Samsung.

(UPDATE: Barnes & Noble spokesperson Mary Ellen Keating issued the following statement to TechHive: "To be clear, we have no plans to discontinue our award-winning line of NOOK products.")

The decline of the Nook could be bad news for book publishers. Fewer people buying Nook e-readers means even more people will be tempted to buy Amazon Kindle devices. While B&N is struggling to get people to buy Nook devices and content, Amazon’s success keeps growing, especially where e-books are concerned. During its most recent earnings report, Amazon said its e-book business rose about 70 percent compared to the year previous. “After five years, e-books is a multi-billion dollar category for us and growing fast,” Amazon CEO Jeff Bezos said in a statement.

Amazon doesn’t break down its sales figures far enough to know exactly how big its e-book sales are, but there seems to be little doubt that Amazon is the dominant force in the e-book market. That’s a problem for book publishers, considering e-books are the fastest growing segment of the publishing industry —and Amazon has a reputation for driving down the cost of e-books, treating them as loss leaders as a way to sell more Kindle devices.

Agency scandal

Amazon's smile almost seems like a smirk, doesn't it?

Fearing a future where books are sold almost exclusively by one retailer, publishers have already tried to break Amazon’s stranglehold. The most recent attempt started in 2010 when five major U.S. publishers—MacMillan, Hachette, Simon & Schuster, HarperCollins, and Penguin—entered into a so-called agency pricing model with Apple, then allegedly used the Apple deal as leverage to force other retailers into adopting the same pricing model.

Under the agency pricing deal, publishers were allowed to set their own prices for e-books and Apple took a cut from all sales through the iBooks store for iOS devices. Amazon (and others) eventually went along with the agency pricing model at the insistence of publishers. Retail pricing competition stalled and e-book prices rose across all online book stores.

The gamble served to break Amazon's utter e-book dominance. The e-tailer's U.S. e-book market share tumbled from 90 percent in 2010, when the publishers announced the agency deal with Apple, to about 60 percent by mid-2012, according to The New Yorker. Barnes and Noble came in a distant second at around 25 percent.

But the U.S. Department of Justice wasn't as pleased as the publishers were with the arrangement. In 2012, the agency charged Apple and the book publishers with conspiring to unfairly raise the costs of e-books for consumers. All five publishers have since settled with the DOJ, which prevents them for reestablishing the agency pricing model for at least two years. Apple has so far refused to settle and appears headed to court later this year.

Amazon released a single sentence statement on the matter: "This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books." That win for consumers was a major blow against book publishers.

Unlock the books!

With the agency model fading into history and Barnes & Noble’s Nook business reportedly in peril, what are publishers to do to keep Amazon in check? A good first step would be for publishers to give up on selling e-books locked down with digital rights management (DRM). The problem with DRM is that it forces you to read books using software from one retailer—Amazon, in this case. And the more DRM-encumbered e-books you buy, the less likely you are to dump Amazon for another e-book retailer since you are so heavily invested in Kindle books already.

We’ve already seen this story play out in the music industry. Fearing Apple’s importance to recorded music sales, the big studios eventually started selling content without DRM so listeners weren’t tied to the iPod. Sooner or later, the publishing industry will have to do the same with e-books or watch their readers be forever saddled to the Kindle. Amazon may not welcome DRM-free books the way Apple famously called for DRM-free music in Steve Jobs’ 2007 letter, Thoughts on Music. But if publishers have any hope of releasing Amazon’s hold on e-books, readers will have to be freed from the shackles of DRM.

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